Record Trade Gap May Fill In Fed Puzzle

Experts Say Rate Hike Is Becoming More Likely

Americans gobbled up the world's goods at an ever-faster pace in June, buying far more from other countries than those nations bought from the United States.

The result was another record trade deficit, the government reported Thursday. Although exports increased, imports rose to record levels and the overall gap surged to $24.6 billion, a 16 percent increase from May and far larger than what was anticipated.

Through the first half of the year, the deficit was running at an annual rate of $236 billion, which would be 44 percent higher than the old record, $164.3 billion, set last year.

Combined with a weaker dollar, economists say, the inflationary implication helps make an even stronger case for the Federal Reserve to raise short-term interest rates when policymakers meet Tuesday.

"The arithmetic is that the trade deficit lowers the U.S. economic growth rate," said Tim O'Neill, chief economist for Harris Bank and Bank of Montreal. "But that doesn't account for the buoyancy of the whole economy that allows for the increased spending for imports."

He argues the factors that have helped keep inflation in check are changing. These included the strong dollar and cheap imports that kept domestic prices down; the low price of oil and other imported commodities, and the positive impact on expectations-- that is, wage demands were muted in the face of low inflation.

After the Commerce Department released its report Thursday morning, the dollar initially fell against the Japanese yen and the euro, then recovered somewhat.

O'Neill said that the dollar overall has essentially remained steady against other major currencies for the last year, which means it has not been helping to keep domestic inflation under control.

"It is possible that the trade deficit will narrow as the year progresses," O'Neill said. "Oil prices, for one, don't have the same upside risk. But the great imponderable is the export side. If other economies--Brazil, Korea, Southeast Asia--improve faster than anticipated, then the trade deficit won't widen as much as projected."

Exports in June edged up 0.5 percent, to about $78.37 billion, only the second gain for 1999. Imports jumped 3.9 percent, to a record $102.99 billion.

The $415 million rise in exports, led by stronger sales of U.S.-made cars and auto parts, was swamped by the surge in imports, led by big increases in shipments of cars and parts, clothing, computers and telecommunications equipment.

America's foreign oil bill rose 3.7 percent in June, to $5.5 billion, as crude-oil imports climbed to the highest level since November 1997.

And, the United States' deficit with Japan ballooned by 19.3 percent in June, to $6.3 billion. The deficit with China rose 7.9 percent, to $5.7 billion.

The deficit with Mexico, one of the partners in the North American Free Trade Agreement, swelled 9.5 percent, to $2.5 billion. The gap with Canada rose to $2.8 billion from $2.08 billion.